Attributable vs directly attributable

The Value Added Tax (VAT) was first implemented in the Philippines in 1988 and has been one of the structural reforms provided under the 1986 Tax Reform Program designed to simplify tax administration and make the tax system more equitable.

VAT as an indirect tax can be passed on to the buyer. While the liability to remit and pay the VAT on a particular sales transaction to the government rests on the seller, the seller can transfer the cost of the VAT to the buyer. On the part of the buyer, the VAT passed on by the seller can be used as an input VAT credit or a credit against the output VAT liability of the buyer. This is subject to the requirement that the creditable input VAT should be properly substantiated with a VAT invoice or Official Receipt that is compliant with the VAT invoicing requirements provided under the Tax Code and other pertinent revenue issuances.

Now what if a VAT-registered taxpayer is engaged in zero-rated sales, such that while it has input VAT credits, it does not have any output VAT liability? Will the input VAT passed on to the said taxpayer simply accumulate throughout the course of the year?

Under the Tax Code, a VAT-registered person, whose sales are zero-rated may, within two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input VAT due or paid attributable to such zero-rated sales, to the extent that such input VAT has not been applied against the output VAT. The Tax Code also provides that where the taxpayer has both zero-rated sales and VAT-able sales, and the amount of creditable input VAT due or paid cannot be directly and entirely attributed to either the zero-rated sales and VAT-able sales, the creditable input VAT shall be allocated proportionately based on volume of sales.

Interestingly, in one of the refund cases that was brought before the Tax Courts, the revenue officials denied the claim for VAT refund on the basis that the input VAT is not directly attributable to the taxpayer-applicant’s zero-rated sales. Here, the taxpayer who applied for a VAT refund is engaged in both zero-rated sales and VAT-able sales. It was the contention of the revenue officials that the creditable input VAT that is refundable must be directly attributable to the finished product of sale that is subject to VAT at zero percent.

In ruling for the taxpayer, the Tax Court explained that Section 112(A) of the Tax Code, which is the Tax Code provision on refunds or tax credits of input VAT from zero-rated sales, merely states that the creditable input VAT should be “attributable” to the zero-rated sales. There is nothing in the said Tax Code provision that requires the Input VAT should be “directly” attributable to zero-rated sales. The Tax Court applied the principle in statutory construction that where the law does not distinguish, we ought not to distinguish.

The Tax Court emphasized that Section 112(A) of the Tax Code merely requires the claimant to establish that: (i) It is engaged in zero-rated sales of goods or services; and (ii) It paid input VAT that are attributable to zero-rated sales. Hence, the claimant must only prove that it made a purchase of taxable goods or services for which it paid input VAT and subsequently, engaged in the sale of goods or services subject to zero percent VAT.

In summary, the rules for purposes of determining the refundable input VAT in a case where the taxpayer is engaged in zero-rated sales and in taxable or exempt sales of goods or services and the amount of creditable input VAT cannot be directly and entirely attributable to any type of such sales, the Tax Court, citing the pronouncement of the Supreme Court in a 2007 case, said that the creditable input VAT should be allocated proportionately on the basis of volume of sales.

Other than this rule on attribution, taxpayers should also take note of the other requirements for VAT refund. Taxpayers should also be mindful of the invoicing requirements under Section 113 of the Tax Code.

Filing a claim of VAT refund can be very tedious, as its success depends on compliance with both the substantive and procedural requirements for refunds. Being mindful of the documentation is key in this, as not only should it be compliant with the rules, but also that the invoices and records are clear that the taxpayer-claimant has zero-rated sales and that there are input VAT that can be attributable (if not directly and entirely attributable) to the zero-rated sales. When in doubt, allocate.

Rocres Jeawel B. Jaramillo is an associate from the tax group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG RGM&Co.

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